Sovereign Wealth Funds And The Price Of Oil

11/01/2007 07:52 am ET | Updated May 25, 2011

The rise of sovereign-wealth funds and the trillions of dollars accumulated by Asian exporters and petroleum producers is prompting growing anxieties around the world, with increasing concerns that the funds will be used as financial weapons. The issue and the nature of sovereign-wealth funds dominated the recent meeting of the Group of Seven finance ministers. Their concerns were highlighted by the issued statement calling on the International Monetary Fund and the World Bank to examine the structure of the funds, their transparency and accountability.

According to the Wall Street Journal the funds have $2 to $3 trillion dollars at their disposal and that could reach $10 trillion within the decade. A former chief economist of the IMF, Kenneth Rogoff, is quoted saying that at that size "they are the global financial system".

Among the current holdings other than China, oil producers stand out. The United Arab Emirates reportedly holds assets of $250 to $875 billion and their investment allocation is unknown. Saudi Arabia in excess of $250 billion, and again allocation unknown. Kuwait $160 to $250 billion investing in Arab and international markets, whatever that means. Russia according to the latest data available, $127 billion and purportedly in fixed income.

SEC Chairman Christopher Cox has speculated that government investment funds could use the "vast amount of covert information" that their spy agencies collect, making that "the ultimate insider trading tool."

The funds however should begin to be scrutinized not only over investment issues, such as China's attempt to take over Unocal or Dubai's efforts to invest in American ports, but also as to deployment of their assets in commodity trading and speculation on international exchanges. This especially so as regards any attempts to manage and manipulate the price of commodities basic to their economies. To date very little has been heard on this issue.

As I have stated before with "Energy Trading Oversight Awakens..." 10.25.07, by divorcing oil trading from the physical product, which is happening on the largely unregulated international exchanges and electronic trading, the potential for mischief has been exacerbated exponentially by "sovereign-wealth funds" of petroleum producing nations with their keen interest in ever higher energy prices. This is especially so given the current trading structure of the markets that can make the identities of both buyer and seller virtually unknowable. Given Chairman Cox's musings on covert information, perhaps opening a new desk at the CIA dealing with this issue might not be such a bad idea.

As an aside, the price of oil shot up more than four dollars a barrel yesterday on the commodity exchanges. This, supposedly, because U.S. commercial inventories dropped by a greater than expected three million barrels. Inventories still stood at over 317 million barrels, and together with the Strategic Petroleum Reserve stood at 1,006,626 bbls, or some 3 million barrels less from the week before, which becomes hardly significant given the magnitude of the numbers involved. Nor, given the very high cost of oil was there much discussion that commercial users are under increasing pressure to reduce rather than increase inventories. Nor that the "shortfall" could have readily been made up with the discharge of two or three VLCC tankers, conceivably at sea and underway to American ports. Altogether, hardly a reason for a stunning $4/bbl plus increase in price unless one or more are using each and every news blip to rationalize what otherwise might too clearly come across as rote manipulation. "Sovereign-Wealth Funds" anyone?

Raymond J. Learsy is the author of the newly updated
Over a Barrel- Breaking Oil's Grip on our Future